Microsoft/Yahoo: The Winners and Losers

Editor's Note: Megan Barnett is Minyanville's new deputy editor. Previously, she was deputy editor at Condė Nast Portfolio.com, where she covered the credit crisis and the fall of Wall Street -- before it all ultimately led to the fall of the publication that employed her.

Prior to joining Portfolio, Megan wrote for SmartMoney, US News and World Report, and The Industry Standard, and even took a spin on Wall Street as an equity research associate for Hambrecht & Quist, which is now part of JPMorgan Chase. A graduate of the University of Virginia, Megan now lives in Brooklyn, NY. We are delighted to welcome her to Minyanville.


It's been a year and a half of flirtation, aggressive courtship, playing hard-to-get, and outright public rejection, but Microsoft (MSFT) and Yahoo (YHOO) have finally agreed on a long-term commitment. The 2 companies announced this morning they've reached a 10-year deal that will have them sharing revenue from advertising based on searches. Microsoft's Bing search engine will become the default on Yahoo's sites, and Yahoo will handle the advertising sales for both companies.

The deal pits the combined forces, which together handle nearly 30 percent of searches on the web, against Google (GOOG), which handles about 65 percent of the queries. But the marriage hasn't been consummated just yet. The deal is subject to approval by antitrust regulators, otherwise known as Microsoft's least favorite Washington bureaucrats. The companies hope to officially begin their honeymoon in early 2010.

Who benefits from the existence of this proposed Microhoo -- and who ends up without an exclamation point in sight? 

Losers 

1. If you're a Yahoo shareholder, the phrase "$31 per share" probably still burns in your memory. That was the price Microsoft CEO Steve Ballmer offered to Yahoo's then CEO Jerry Yang for the entire kit and kaboodle back in February 2008. Yang scoffed, Microsoft walked, and Yahoo shareholders are now stuck with a stock worth half that amount. And so far it seems Yahoo shareholders aren't buying Yahoo CEO Carol Bartz's claims that the deal will bring "boatloads of value for Yahoo" and that the "boatload of cash is us preserving our revenue line." Yahoo shares are down boatloads today instead.

2. Terry Semel, Jerry Yang, and all the other former Yahooligans who couldn't get a deal done with Redmond. The details of today's announcement might not be sitting well with shareholders but this deal could end up saving the company from extinction.

3. Advertising clients might not find this deal so easy to swallow. What was once a simple, clear-cut relationship with one of the companies will likely become a complex maze of obstacles, with Microsoft handling the technology and Yahoo handling the sales in this new partnership.

4. Wall Street. The investment bankers advising Microsoft and Yahoo during these past 18 months of deliberations will now have to live with the fact that the 2 companies reached a deal without the exchange of any cash or shares, leaving them with about 2% of nothing.

Winners 

1. Steve Ballmer. What he once offered $40 billion for, he's now getting for free. Microsoft is not paying Yahoo an upfront fee for the partnership, as some Yahoo investors had hoped when the deal talks were buzzing. Instead it will pay Yahoo 88 percent of the revenue from the searches during the first five years of the partnership. In exchange, Microsoft gets its search engine across the coveted universe of Yahoo properties and a leg up on the company it loves to hate, Google.

2. Google. Don't count on the existence of a Microhoo to bring much damage to the Goliath of the web. After all, there is no promise that the combined companies will increase market share as a result of their partnership, but there is every reason to believe that the deal's complexity could end up hurting it, leaving Google to pick up the pieces.

3. Yahoo users. Virtually nothing should change for the end users of Yahoo's properties, with the exception of the words "Powered by Bing" apppearing in your search results. That's a victory for Yahoo and its audience.

4. Innovators. Web users will now have essentially 2 search engines to choose from online. It may be a tough market to break into, but the savviest of entrepreneurs should see this as a big opportunity.